Millennials are putting no stock in equities
Most financial advisors urge people in their 20s to load up on stocks. The only problem is that, according to a growing body of research, these young investors want nothing to do with stocks.
Rather than maximize their potential returns through big chunks of stocks in their portfolios, many young investors these days are taking a more cautious approach. According to a survey from brokerage UBS, for example, the typical millennial investor holds more than half of his or her portfolio's assets in cash, a stance more appropriate to retirees. In fact, the millennials' fear of stocks more closely mirrors that of the World War II generation than it does either Generation X or baby boomers.
Bankrate.com, too, reports that about 4 in 10 young investors said that cash is their preferred way to invest.
Read More Gen Xers need advisor help "Millennials are skeptical of long-term investing as the way to achieve their own success," said Sameer Aurora, head of client strategy at UBS. Instead, they believe more in the power of saving, something that's a hallmark of the generation that lived through the Second World War.
Their conservative posture is driven by three things, Aurora said. First, the financial crisis still looms large for many.
Next, market volatility so severely rattled their parents, devastating 401(k) plans and plummeting home values, that it's given young people a sour taste about stocks. And finally, the abysmal labor market that greeted their entrance into their career lives still suppresses their job prospects. The paradox, of course, is that millennials will likely face an even greater do-it-yourself retirement than older generations do. Social Security's trust fund is expected to be depleted in 2033 and Medicare, the health insurance program for retirees, in 2030. Read More Boomers' $30 trillion gift to Gens X, Y In fact, according to thel atest annual report from the Social Security and Medicare trustees, "Neither Medicare nor Social Security can sustain projected long-run program costs in full under currently scheduled financing." Without even these guarantees, the millennials will need as much savings as they can scrape together. So how do advisors get this stock-shy generation to invest for the long term?Certified financial planner Michael Branham with Cornerstone Wealth Advisors believes that the same rules of investing may not work for this generation.
"It used to be that if you're in your 20s, you could afford to have 100 percent equities because you had so much time," he said. "Maybe that's not true anymore." Read More Coping as retirement looms And he added: "You can't push somebody out of their risk aversion." To get over those fears, Jon Stein, CEO of online advisor Betterment, believes many would be better off focusing on meeting their financial goals."Our model tells you how to allocate your money and lets you break up your money for those different things," he said. "Each of those can have a different risk appetite." Short-term needs, such as a down payment for a first home, naturally have a much smaller allocation to stocks than does saving for retirement, which has a 40-year time horizon and therefore more exposure to risks.
By keeping money in these different pools, people can see that their immediate financial needs are taken care of, no matter how markets behave. Read More Retirees turn to encore careers There is reason to believe that that's just the approach that many young investors are taking. The Investment Company Institute, a mutual fund trade group, surveyed the actual holdings of 401(k) plan participants and found that people in their 20s held an appropriate amount of stocks.
Almost two-thirds had between 80 percent and 100 percent in 2012, a marked jump from 2007, when fewer than half of people in their 20s had that much in stocks. That's probably because of 401(k) plan designs, said ICI's senior director of retirement and investor research Sarah Holden. Many plans now use automatic enrollment to enroll their participants.
When participants are auto-enrolled, the default allocation is typically into a target-date fund, a fund that invests according to the time horizons of its shareholders. And participants in their 20s are directed toward target funds with the longest time horizons and therefore the greatest allocation toward equities. Read More Leveling the retirement-plan playing field "Initially there was a concern that they were going to be overly conservative," Holden said. "Yet when we look at the data, looking at the primary way that people invest-which is through their workplace retirement plan-the current plan design puts them on the right path to save for the future." Even when the ICI looked at Roth individual retirement accounts, they found that young people held an appropriately high percentage of their accounts in stocks. Roth IRAs are a good proxy for investor sentiment, Holden said, because Roth IRAs typically are opened with contributions, which is a very active decision.
Therefore, opening one and maintaining one requires the owner to be active. "We found that the younger you are, the more likely you are to be invested in equities," Holden said.
Financial advisor Josh Bedell of Gage-Wiley said that none of his 20-something clients were overly conservative. When he looked through his client roster, he found that the 20 or so of his clients who are in their 20s are open to suggestions to load up on stocks for long-term goals. Read More 10 questions to ask your advisor Bedell spends a good deal of time explaining the historical risks and returns of equities versus less volatile asset classes, and these young clients are convinced of the need to own stocks.
"I've read the surveys that say that millennials are conservative, but I'm just not seeing it," he said. -By Ilana Polyak, special to CNBC.com
